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A Note About Inflation


A note about inflation.

For quite a few years now, some experts have predicted great inflation due to the easy money policies of the Fed since the Great Recession. For example, Larry Kudlow, President Trump's recently appointed Director of the National Economic Council said the following in response to a question during an interview published in Townhall.com on May 5, 2009:

Interviewer: In the long run, shouldn't we be terrified by the prospect - or the near certainty - of serious inflation because of all that money being pumped into the economy?
Kudlow: No doubt about it. It's down the road - you're talking about maybe two years.

That was nine years ago. And, Kudlow was not alone in confidently predicting imminent "serious inflation".

Recently, I did a quick study of inflation during the past 30, 20 and 10 years (1988 to 2018). The details can be found here. The summary follows:

US inflation for the past 30 years has averaged 2.57% per year.
US inflation for the past 20 years has averaged 2.16% per year.
US inflation for the past 10 years has averaged 1.62% per year.

Some of the same experts who were sure that serious inflation was just around the corner also advocated that investors purchase gold. Why? Because the value of gold skyrockets during periods of high inflation. Why? Because it is shiny.

My point? Predictions, especially about the future, are hard. (Thanks to Yogi Berra for succinctly stating an obvious truth.) There are so many factors. And, all else is never equal. Having too much trust in experts may not be the smartest approach. Years ago I read a book with the title, "Winning the Loser's Game", by Charles Ellis. His premise was that in some sporting events the secret to winning is merely to not lose. That is to say that in some endeavors, like investing you win by avoiding costly mistakes. For investors, placing too much confidence in any single prediction could be a costly mistake. Hence, we diversify because our expectations may be incorrect.


 

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